Change Triggers-How much risk business can take?

Change Trigger-- Crisis in Insurance industry

AIG story --USA

What the world knows of American International Group (known as AIG ) is not as an ordinary 

player in the insurance industry .AIG always been a David Beckham or Ronaldo  and been different 

insurance giant and global company that would not follow the beaten track but always built better 

mouse traps .

They were  an exceptional insurance company and would insure even the weirdest items like 

shrunken skulls collection , 15^th century witchcraft book printed on human skin, trophies of stuffed 

animals, a model of Marc Quinn’s self-sculpture made of his own blood. At the same time, they also 

would go to any extent to settle or even deny claims. A client had wrecked his Ferrari Enzo and 

AIG would  satisfy him by remaking the wrecked car in Italy. When a client had thrown his entire 

vintage wine collection into the pool fearing the wild fire .Then he lost  the labels and the value 

while fire did not even  reach his mansion  and  AIG would settle the huge claim leaving  the 

collector  to enjoy his vintage wine collection

 AIG was always  high risk monger  and its financial products division was known as synthetic 

buyer of varieties of asset backed securities.At the same, time when profits declined AIG was 

accused of resorting  to strategy of  claim denials . Metro-Goldwyn-Mayer Studios Inc., had at 

one time, accused AIG unit of "pulling the rug" out from under a policy to defend the studio against 

lawsuits at  critical trial over ownership of the James Bond movie franchise. AIG settled   

only after a California state court judge found that the AIG unit had wrongfully dropped the 

coverage.  Numerous consumer lawyers had expressed the view  that the company's business 

strategy was always  "Just say no." when it came to settling claims 

AIG’s downturn was largely a result of  aggressive culture reflected  in their investment strategy 

to make optimistic bets on the housing market and other asset classes without having to actually buy 

the bonds backed by mortgages or other assets. The AIG’s investment strategy has remained a

mystery   to ordinary people . While to the normal eye AIG appeared to be  insuring 

mortgage bonds packaged by banks  AIG’s misplaced  belief was that  there won’t be any 

probability of making payout . Goldman Sachs and Merrill lynch all compounded the  messy 

business in one way or other. One day AIG reported results and said the swaps had declined in 

value, by $352 million. When the situations went bad AIG’s image collapsed to one of a demon. 

AIG’s business was built not by clean methods and without unquestionable methods by their 

executives .They always were driven by the power elite and by creating relationships with powerful 

business and government leaders who would oblige with favors  for personal gains.Seizing 

opportunities at high risk  was  the norm  and quite normal and acceptable in AIG;s culture 

AIGFP, a division of AIG in London  did  seize an opportunity for potential new business and to  

make windfall  profits  by insuring CDOs against default .It came through a financial product called 

credit default swap.  AIG  was never concerned about the high risks associated with covering a 

volatile  market . This new risk insurance product turned out to be money spinner  initially as  the  

revenue  jumped to  over $3 billion contributing to 17 to 18% of the total revenue.

What it meant to those who engineered  this new money spinner  through AIG;s  reward plan was  

 huge incentive payout for those top executives. Personal  greed won  by pushing company interest 

behind .

When economy behaved badly and foreclosures rose to high levels and  AIG’s forecasts of    no 

payout at the future , went haywire and they had to end up paying out huge amount on what their 

insurance covered. Otherwise solid insurance company got  itself into quicksand  situation  by 

lending securities from its life insurance companies’ portfolios. Short term cash from collateral 

diverted to long term investments with hope of no decline in values and  making windfall  profits  

went completely  hay ware .

AIG's revenue and profit streams were hit so hard they had to go bankrupt. The extent of the loss to 

the division was at $25 billion and that had to affect  the parent company's stock price. More 

trouble came from accounting problems and irregularities that added to the losses. AS AIG's credit 

rating nosedived, it had to end up  providing additional   collateral for its bondholders, which caused 

severe  drain  for the over stretched financial situation. The stocks nosedived in NY stock exchange

AIG was Looking for bailout? or too big to fail?

...read on